CHAPTER | ‘THE ECONOMY IN 1973-74 : A SYNOPTIC VIEW Introduction 1.1 The most important characteristic of the eco- nomic situation in 1973-74 was a sharp acceleration in price inflation. The wholesale price index on Decem- ber 29, 1973 was 26 per cent higher than at the end of December, 1972. ‘This order of increase, coming, as it did, in the’ wake of an increase of neatly 14 per cent in wholesale prices between December, 1971 and December, 1972, was bound to cause’ widespread hardships to the people. It is, therefore, not surprising that the discussion of economic policy during the year has been dominated by concern Fegarding rising prices. 1.2 It was pointed out in last year's Economic Survey that, because of a severe decline in agricultural production ‘in 1972-73, the price situation would emain a cause for serious concern and anxiety during 1973, However, it was then anticipated that with @ good ‘rabi crop to be harvested in April-May, 1973, followed by a normal kharif crop later in the year, the pressure on prices would be considerably reduced. In the event, the rabi crop witnessed a decline in output as compared to 1972 ctop. This fact, coupled with a number of other factors, such as, inadequate pro- urement, the steep increase in international prices of foodgrains, inadequacy of stocks of food with the public sector agencies and large budget deficits, strengthened the inflationary psychology. As a result, prices in- reased at an accelerated pace during the months of April to July 1973, Although from all accounts the 1973 kharif crop was much better than that of 1972, this has not made any visible impact on prices. This, is essentially due to the fact that despite a consider able increase in production in 1973, the output of Kharif foodgrains was. at best no higher than’ 1970. Due to a rise in population and cumulative impact of increased monetary outlays in the last three’ years, fone good crop cannot be expected to bring about a stable balance between demand and supply. There is, also no doubt that in the background of steep in- creases in prices that have taken place in the last two years, those sections of the community, whether pro- ducers, traders or consumers, who have the capacity to hoard sizeable stocks, have felt tempted to hold larger than normal stocks. This has naturally aggra- vated the price situation. 1.3 The uncomfortable food situation in. 1973 neeessitated large scale imports of foodgrains at abnormally high international prices. These have considerably swelled the import bili, leading to a substantial drawdown of reserves, and the emergence of a sizeable deficit on trade account, des~ pite good performance on the export front. Towards the latter half of the year, balance of payments came under further strain due fo a sharp escalation in the price of imported crude oil. The. situation with re- gard to industrial production and industrial invest- ‘ment also does not provide much room for cheer. Data available so far indicate that industrial produc- tion has increased only a litle, if at all, during the better part of the year. Public sector investment in industry and minerals is also likely to be no more than last year 1.4 The balance sheet for the economy thus looks istinetly unfavourable, and there is little point in ‘minimising the task that the country faces in the com- ing year. ‘The Government has responded to the eco- nomic challenges faced by the country through a variety of policy measures. These have been directed towards relieving the basic causes of economic diffcul- ties as well as minimising their adverse effects on more vulnerable sections of society. That these policies have not made a significant impact on the price situation is too obvious a fact to need any elaboration. 1.5 In the following paragraphs, an attempt is made to briefly summarise the performance of the economy in 1973-74, The chapters that follow des- cribe in detail the developments in major sectors of the economy and the manner in which public policies have responded to the needs of each sector. Tans Il 1. National income at constant. prices? Agricultural production Food production Industrial production Electricity generated Wholesale prices Money supply Imports Exports : Freight carted by railways Provisional Estimate. Fapribfune, 1973 compared to April-June, 1972, ‘Apri December, 1973 compared to ApricDecember, 1972, (@AS on January 25, 1948 compared to March 31, 1993, TFApHI-October, 1973 compared to Apri-Ostober, 1973 SELECTED ECONOMIC INDICATORS 1960-70, 1972.73 197-72 iso 78 (Percentage change over previous year) a 3 tt 6.0 er 73 so : Sa sa 0 | 8s Ta 30 33 53 mathe wa Ba ee TS Tale 37 55 40 39 2 10.8 113 BL 159 96a rt 33 We 1's a7 a a6 43 a9 20.011 2s 07 a6 3National Income, Savings and Investment 1.6 Although no firm estimates of national income are available ‘beyond 1971-72, it is likely that in 1972-73 national income (at constant 1960-61 prices) showed a small decline, Industrial produc- tion in that year had increased by over 5 per cent, but this was’more than offset by a steep fall in ag- ricultural production, In the current year ie., 1973-74, however, itis likely that the rate of growth of national income will be about 6 per cent. This again is the re- sult of a substantial anticipated increase in agricul- tural production, Industrial production is likely to make a small, if any, contribution to the growth of national income. Taking the Fourth Plan period as a whole, the average annual rate of growth of national income is not likely to exceed 3.5 per cent as com- pared to the Plan target of 5.7 pet cent 1.7 Both savings and investment in the economy seem to have reached their peak levels in 1955-66. Available data show a gradual increase in domestic savings as a percentage of net domestic product at market prices) to the level of about 12 per cent in 1965-66 compared to 8.6 per cent in 1961-62, After that, the savings ratio tended to decline until 1969-70 when it picked up again and is estimated to have reached the level of 11.0 per cent in 1971-72. In 1972-73, according to Reserve Bank series on savings, there seems to have been a further increase in the tatio, 1.8 In the absence of both income and savings data, it is not possible to judge whether the savings ratio will continue to show an upward trend in 1973-74, One partial, though imperfect indicator of growin of savings in the economy is the growth in time deposits with commercial banks. In the current financial year, time deposits with banks have shown a high rate of growth and had increased by Rs. 1144 crores upto January 25, 1974 as against an increase of Rs. 866 crores over the corresponding period of last year. However, in the absence of complete data re garding asset-holdings of the household sector, it is, not possible to say whether the growth in time deposits represents only a shift in the pattern of asset-holding for a net addition t0 total savings in the economy. 1.9 Aggregate investment in the economy can be estimated by adding net inflow of foreign resources to the estimate of domestic savings. The ratio of niet investment to net domestic product (at market prices) reached 14.7 per cent in 1965-66. There- after, the investment ratio declined to 10.8 per cent in 1969-70. ‘The fall in the investment ratio during Period was steeper than the fall in the savings ratio because of a simultaneous decline in net inflow of foreign resources. There was, however, an increase in the investment ratio after 1969-70 and it reached the level of 12.2 per cent in 1971-72. According to Reserve Bank data, which are not strictly comparable to the above figures, which are based on data compiled by the Central Statistical Organisation, the investment ratio remained stable in 1972-73. 1,10 In 1973-74, public sector investment is unlikely to be higher than in 1972-73. Partial information available for a section of the private corporate sec- tor shows that any increase that might take place in private corporate investment in 1973-74 is un- likely to make up for the stagnation in public sector in- vvestment. Since at the same time, real national income is likely to grow by about 6 per cent, it follows that the investment ratio this year may be lower than last year. In a year when price stabilisation has been the major objective of economic policy, this outcome is not al- together unexpected. Over the medium term, how- ever, there can be no doubt that the success of both development as well as stabilisation efforts would de- pend on the ability of the economy to raise the level of investment at the expense of aggregate consumption. Agricultural Production 1.11 Agricultural output which declined by 0.8 pet cent in 1971-72 registered a further sharp fall of 9.1 per cent in 1972-73. ‘The behaviour of agri- cultural output. in 1972-73, reflected the widespread drought conditions that prevailed almost all over the country in that year. Production of foodgrains as well 5 principal commercial crops, excepting sugar- cane, declined significantly. Two ’ most disturbing facts’ about cropwise pattern of production in that year were: a fall in the production of wheat for the first time since 1967-68, and a sharp decline in the output of coarse grains and major oilseeds, parti- cularly groundnuts. Output_of groundnuts fell from 6.2 million tonnes in 1971-72 to 3.9 million tonnes in 1972-73. Total output of five major oilseeds fell from 9,3 million tonnes in 1970-71 to 8.8 million tonnes in 1971-72 and to 6.7 million tonnes in 1972-73, This led to a phenomenal increase in prices of vegetable oilseeds and oils. 1.12 Fortunately, the unsatisfactory trend in agricul- tural output during the last two years is likely to be re- versed in 1973-74. Preliminary estimates of output of the Kharif food crops range between 65-68 million tonnes, and according to present indications it is likely that total output of foodgrains during the year may be about 110 million tonnes. ‘The prospects for commer- cial crops are also equally good. For example, the out- put of raw cotton which declined from 6.6 million bales in 1971-72 to 5.5 million bales in 1972-73, is expected to increase significantly in 1973-74. Simi- larly, the output of principal oilseeds may again be close to the peak level of 9.3 million tonnes reached in 1970-71. 1.13 There ate thus definite indications thatthe index of agricultural production in 1973-74 will re- gister an increase of 10—15 per cent. This is cer- fainly the most favourable development of the current year. However, it must also be pointed out that even’ then output in most cases in 1973-74 may not bbe significantly different from the corresponding out- put in 1970-71, This cannot but be a cause of con- cern since in the meanwhile population has grown at an average annual rate exceeding 2 per cent Recently, it has been observed that while the growth of productivity in the case of wheat has slackened, there has, correspondingly been no acceleration in the growth of productivity in the case of other food- grains. The new high yielding varieties of seeds haveNET NATIONAL PRODUCT [NATIONAL Income] (@r 1900-41 pmices) REVISED SERIES NATIONAL INCOME PER CAPITA INCOME ends norte 21000}—__—___| | 30 20000|—— — cee 1 370 19000 80 18000 17000 340 16000 15000 320 14000 310 13000 - 300 1960-61-63 -65 -67 -69 -71 -73 60-61 -¢3 -€5 -87 -t9 -11 -73 MTR OF Fined, Keowee omsion SRD RLCTI ae Haso far made no significant impact on the production of rice and coarse grains. In addition, over the years there has been no break-through in’ the produc- tion of oilseeds and the output of pulses has conti- ued to decline. All these facts are indicative of significant gaps in out agricultural performance. 1.14 In the management of India’s food economy there were two important poliey developments during the year. One was, of course, the take over of the wholesale trade in wheat; and the other was a subs- tantial increase in procurement prices as well as issue prices of kharif cereals. The procurement of wheat from the 1973 rabi crop fell short of the procurement target by a considerable margin and was also less than procurement out of 1972 rabi crop. This was no doubt partly due to a fall in the output of wheat. How- ever, it appears that procurement was also hampered by Considerable resistance on the part of farmers and erstwhile wholesale traders. It has been sug- gested that the unsatisfactory progress of — procure- Hear was on account of an uureqruneralve procars- tment price. However. the fact that the shortfall in rocurement was relatively less marked in a State like Panjab, which has. much ipher "cot of production than many other States, indicates that this factor ould not bo a sufficient explanation ‘of the shortfall. However, the experience regarding wheat had.» major influence on the evolution of food policy for the kharif cereals. Thus procurement prices were increased significantly in order to induce farmers to sell more of their grain to the public sector agencies. in addition, in order to keep the amount of food subsidy within safe limits, issue prices of ice, wheat and coarse grains were revised towards the closing months of 1973. 1.15 How far a higher procurement price will help in achieving the procurement targets for the Khanit cereals is yet to be seen. Clearly, in this matter public policy faces a dilemma : if procurement prices are not sufficiently remunerative, farmers will not sell their grain to the public sector agencies. At the same time, pushing the procurement prices too high Will inevitably reduce the effectiveness of the system of public distribution in protecting the vulnerable sections of society whose paying capacity is bound to be severely limited. Industrial Production 1.16 Data_on industrial production are available for the first half of the calendar year 1973. These show that there was a small decline in the index of industrial produetion during the period. Performance in certain critical sectors, such as, steel, power, and fertilisers was particularly unsatisfactory. On present indications, it is likely that growth of industrial pro- duction in the current year would be very low. Apart from normal factors (e.g. inadequate availability of raw materials, transport bottlenecks, labour unrest, a low level of industrial investment, and manage- ment problems. etc.) which have restrained indus- trial activity in the country in recent years, _ this year's production was also affected by a widespread Shortage of power. Total generation of power in 1973 is in fact likely to show a decline over 1972. Part of the reason for stagnation in electricity generation was the failure of monsoon in 1972; an equally important reason has been inadequate maintenance and in- Sufficient attention to operational efficiency in genera- tion and transmission of power. 1.17 While the overall growth in production is likely to be unsatisfactory, there are some hopeful signs. One such development is the satisfactory per- formance of the heavy engineering industries, the metal manufacturing industries, heavy electricals, and transport equipment industries. ‘The agareate’ per formance is likely to have been much better but for the slow-down in growth of textiles and the chemicals group of industries. Another hopeful development is the fact that, in 1973-74, several public sector indus- ‘rial enterprises have shown a substantial increase in output as compared to the corresponding period of 1972-73. In a country like India the satisfactory per- formance of public sector enterprises is of great im- portance since this adds to resources available for Public investment at the same time that it augments the availability of goods and services in the country. Prices 1.18 Compared to an average increase of 7.8 per cent in 1972, the wholesale price index went up by 19.2 por cent in 1973. Although prices. rose almost every month in 1973, the largest increase took place in the period May-July. The index registered a slight decline for a brief period in August-Septem- ber. However, since October, 1973 the index has again risen every month, though at a much slower rate. Thus, the normal seasonal decline in the price index, which takes place from mid-September to December, did not occur in 1972 as well as in 1973. 1.19 An analysis of price movements in 1973 points to the leading role of food articles and indus- trial raw materials in determining the behaviour of the price index. ‘The two groups together accounted for as much as 78 per cent of the increase in the wholesale price index in 1973. While for the period as a whole, the contribution of foodgrains and indus- ttial raw materials in price rise remained predomi- nant, it is worth noting that, after July, 1973, prices of manufactured goods emerged as a more. impor. tant causal factor in price inflation, Prices. of both intermediate products and finished products increased substantially during the period. Prices of interme- diate products have increased partly because of a steep increase in international prices of non-ferrous metals. a8 well as due to a substantial increase in the administered prices of iron and steel items in Septem- ber and October, 1973. Among finished products, the largest increase was’ recorded by prices of mill cloth, metal products and oilcakes. Fiscal and Monetary Policies 1.20 The major task of fiscal and monetary poli- cies during 1973-74 was to assist in the control of fiation, A principal objective of the Central Govern- ment budget for 1973-74 was to greatly reduce te- liance on budgetary deficits for financing public sectorconsumption and investment. In pursuance of this objective, the Central Government decided in August, 1973 to further reduce its expenditure by Rs. 400 crores without affecting investment in the vital core sectors of the economy. As against the budget provision of Rs. 326 crores for market loans, net Feceipts until December, 1973 amounted to Rs. 472 crores, even though a sizeable part had to be ab- sorbed by the Reserve Bank. “However, both be- cause of the unexpected shortfall in collections from excise duties and much higher expenditure (on items such as, relief of natural calamities, the liability arising out of the Pay Commission's recommendations, in- crease in food subsidy despite upward revision of issue pprices and a significant deterioration in the railways’ financial position), the Government's efforts to contain the size of the budgetary deficit are unlikely to meet with a significant degree of success. 1.21 Despite continued emphasis by the Re- serve Bank on credit restraint, credit expansion to the commercial sector recorded an unusually large increase in the 1973 slack season. For the current busy season, the Reserve Bank has set a quantitative ceiling of Rs. 400—450 crores for aggregate expansion ‘of bank credit to the commercial sector, excluding eredit for food procurement and exports. In the current busy season so far, ic. until January 25, 1974, bank credit for non-food commercial sector expanded by Rs. 447 crores as compared to Rs, 427 crores during the corresponding period of 1972-73 busy season. This suggests that if genuine additional needs of productive sectors ate to be met without up- setting the Reserve Bank’s aggregate ceiling, there will have to be considerable redeployment of outstandi credit in the next two or three months. Money supply with the public has increased by Rs, 407 crores in the current busy season until January 25, 1974 as com- pared to RS. 442 crores during ‘the corresponding period of last busy season. However, in the calendar year 1973, money supply with the public increased by 15.8 per cent. This indicates the persistence of a size- able imbalance between aggregate demand and supply in the economy. International Trade and Payments 1.22 Balance of payments data are not, available for either 1972-73 or 1973-74. Customs data com- piled by the Director General of Commercial Intelli- nce and Statistics, however, show. that. these Years fave been good years for growth of India’s exports, Exports incteased by 21.9 per cent in 1972-73 and by 20.8 per cent in first eight months of 1973-74 as against an increase of only 4.8 per cent in 1971-72. Part of the explanation for increase in exports in 1972- 73 lies in certain temporary factors e.g., credit financed exports to Bangladesh. It is also likely that due to frequent changes in exchange rates during this period, the growth in foreign exchange carnings is likely to be lower than the growth in rupee value of exports. Further, the fact that higher prices for some of our traditional exports have made. a significant contribu- tion to export growth since 1972-73 is indicative of the potential weakness of our export effort. As the international commodity boom ends, some of our exports are bound to be affected. A significant shortfall in exports of engineering goods in relation to the Fourth Plan target is another indication of the weakness of our export base. Thus recent export performance, welcome as it is, cannot be accepted as a definitive evidence of a break-through. 1.23 India’s imports recorded a fall of 1.5 per cent in 1972-73. “However, according to data avail- able for the first eight months of 1973-74, imports increased by about 45 per cent as compared to the corresponding period of 1972-73. ‘The trade balance in 1972-73 showed a surplus of about Rs. 164 crores as compared to a deficit of Rs. 216 crores in the vious year. During the first eight months of 1973-74, the trade balance showed a deficit of about Rs. 7i crores as against a favourable balance of about Rs. 156 crores during the corresponding period of the previous yest. The trade balance is hikely to show considerable further deterioration in the remaining months of the Year due to a steep increase in import prices of crude oil. 1.24 That our balance of payment has been under considerabale pressure this year can be de- duced from the movement of foreign exchange re- serves during the year. In rupee terms, reserves were at a comfortable level of Rs, 846.6 crores at the end of 1972-73. However, in the first ten months of 1973-74, reserves have declined by Rs. 70 crores. The pressure on reserves and balance of payments is likely to increase still further in the remaining months of this year because of a sharp escalation in the price of curde oil. 1973-74 : Overall Assessment 1.25 The preceding brief survey shows that both “agricultural production and” national in- come are likely to record a. significant in- crease in 1973-74, Nevertheless, the economy con- tinues to be under severe strain. partly because the expected increase in agricultural production and na- tional income has come in the wake of two successive Years of unsatisfactory performance. Presently the Ereatest concern relatés to the price situation. Ano- ther area of concern is the sluggishness in industrial production and continued under-utilisation of existing capacity in several critical sectors, such as, iron and steel and fertilisers. Further, because of a steep in- ‘tease in the price of imported crude oil and sizeable imports of food, the balance of payments is also likely to show a significant deterioration. The continuing good performance of exports is a relieving feature in the present situation, but this by itself is unlikely to provide an adequate’ answer to the emerging balance ‘of payments problems created by the sharp increase in oil prices. “Thus maximum economy will have to be observed in the use of imported supplies, and measures designed to increase the domestic production of such critical import-substitutes as iron & steel, coal, oil and non-ferrous metals will have to receive urgent attention, 1.26 The experience of 1973 has once again de- monstrated the crucial place that agriculture has —in our economy and the disruptive effects of unsatisfac- tory performance in agriculture on all other aspects of economic performance, g., industrial production,prices, balance of payments, the budget, and the dis- tribution of income. In this context, the wide fu tuations in agricultural output from ‘year to year, depending on the vagaries of the monsoon, perhaps constitute the most basic single problem in the sound ‘management of the economy. As was pointed out in last _vear's Economic Survey, reduction of this in- stability, through a speedy expansion of the area under irrigation and evolution of suitable techniques of dry farming, constitutes one of the most pressing imme- diate tasks before the country. Both economic elfi- ciency and social justice demand that no effort need ‘be spared to make a significant advance on this front in the coming years. 21M of Fia/73—2. 1.27 Notwithstanding the pivotal place of agri- culture in the economy, the importance of sustained rrowth of industrial production and investment for ong run development of the “economy ‘cannot be overemphasised. Diversification of the economic structure is possible only through industralisation, which means that the industrial base of the economy ‘must progressively gain in importance. growth of industrial production in the last few years hhas been far from satisfactory. Economic manage- ment in the coming years will have to find effective ways and means of imparting a new element of dyna- mism to India's industrial economy. This task will have to be accomplished despite the increased severity of the foreign exchange constraint